Business 5.1

Why do new businesses need to raise finance?

An entrepreneur might need to spend money on:

1. Renting or buying a building

2. Vehicles

3. Advertising

4. Equipment/Machinery

5. Inventories of raw materials

6. Labour

Why do established businesses need to raise finance?

Established businesses might require an injection of funds in order to:

1. Expand

2. Improve efficiency

3. Develop new products

What are some internal sources of finance?

These are available within the business and don’t require borrowing which often has a high rate of interest

1. Owners’ funds

2. Retained profits

3. Selling assets

4. Trade credit

What are some external sources of finance?

These allow companies to raise a lot of finance, but can bring disadvantages such as high interest rates.

1. Bank loans

2. Mortgage

3. Overdraft

4. New shares

5. Private loans

6. Hire purchase

7. Government Grants

Retained profits

Retained profits are the money a company keeps after it makes a profit, instead of giving it all to the people who own the company (shareholders). This money is saved and used by the company

Adv

• No interest payments

• can be arranged immediatly

Disadv

• only avail to profitable businesses

• shareholders may oppose decision

Selling Assets

Selling assets means a company or person is selling something they own in order to get cash. Assets can be things like buildings, equipment, land, or even shares in other companies.

Adv

• no interest payments

• may keep assets (if leased back)

Disadv

• many businesss do not have suitable assets

• leasing assets back means regular payments

Bank loans and mortgages

A bank loan is money you borrow from a bank that you agree to pay back over time with extra money (interest). You can use it for things like buying a car or paying for school.

A mortgage is a special kind of loan used to buy a house. The bank lends you the money to buy the house, and you pay it back slowly, usually for many years. If you don't pay it back, the bank can take your house.

Adv

• can be arranged quickly

• allows repayment over a long period of time

Disadv

• Interest has to be paid

• banks may require an asset as collatoral

Selling Shares

Selling shares means you are selling a small piece of ownership in a company. When you buy shares (also called stocks), you own a part of that company. If you decide to sell your shares, you are giving up your ownership in the company in exchange for money.

Adv

• No interest payments

Disadv

• the owner may lost control over the company

• only avail to companies

Government Grants

A government grant is money that the government gives to people, businesses, or organizations to help them with a specific project or purpose. Unlike a loan, grants don’t need to be paid back.

Adv

• Many gov grants dont have to be repaid

Disadv

• a business may have to meet strict conditions to recieve a grant

• Businesses may have to invest money alongside the grant

What is one advantage and disadvantage to Chelsea Football Club of using its profits as a source of finance to buy new players.

Advantage:
Using its own profit to buy new players means Chelsea doesn’t need to borrow money or pay interest. This helps the club save money and stay financially healthy.

Disadvantage:
If Chelsea spends all its profit on new players, there may not be enough money left for other important things, like stadium improvements or paying staff.